OECD Pensions Outlook 2024

6. Home equity release products for the elderly: opportunities and challenges

Jessica Mosher

Abstract

This chapter provides an overview of the different types of home equity release products available across OECD countries and describes their features and design. It highlights the potential benefits of these products and discusses the need to ensure that adequate protection is in place for users of the products. It also describes some supply-side barriers for the market and measures that can help to mitigate risks for providers.

The home represents a significant portion of total wealth for many households in retirement. A product that allows homeowners to access and use that equity therefore has the potential to significantly improve retirees’ standard of living and their financial outcomes in retirement. Additionally, home equity can be a valuable source to help retirees through significant financial shocks that they otherwise might struggle to overcome (see Chapter 5). Nevertheless, the market for home equity release products remains relatively small or non-existent in most OECD countries.

Expanding the availability of home equity release products requires ensuring that the regulatory framework includes adequate protections. There are a number of potential risks to homeowners relating to the design and use of these products. Additionally, several barriers and risks on the supply side remain to be addressed in order for providers to be willing to participate in the market.

This chapter aims to understand the home equity release products for the elderly available across the OECD and the benefits and risks they can pose for both homeowners and providers.1 The first section provides a general overview of the different types of products. The second section highlights standards that industry groups have developed. The third section compares product features and discusses the implications for homeowners. The fourth section considers supply-side barriers and risks to providers. The fifth section discusses how these products are used to improve financial outcomes in retirement. The final section concludes with a discussion around the implications for the regulatory framework around these products. Annex 6.A summarises the details of products available in the countries covered.

6.1. Overview of home equity release products

Home equity release products have the potential to improve both standards of living in retirement as well as overall well-being for a broad group of retired homeowners. First, they give individuals access to their home equity, which often represents a substantial proportion of their wealth in retirement. Second, they allow individuals to stay in their homes until they die or have to move to a long-term care facility. Finally, they are normally more accessible than traditional home credit products because borrowers are not necessarily required to pass income and credit checks.

Home equity release products are largely based on two models, a loan-type model and a sale-type model. The loan-type is often referred to as a reverse mortgage, which is a loan backed by the home as collateral. There are two types of products that involve a full or partial sale of the home equity. One is a home reversion, which involves selling all or part of the home equity to another party while retaining the right to reside in the home. The other is a sell and rent back scheme, whereby the home is sold to a third party and rented back to retain occupancy.

Several jurisdictions have government-backed programmes that provide home equity release products. However, these programmes do not normally exclude private providers from also offering the products in the market. This discussion encompasses both types of providers.2

6.1.1. Reverse mortgage

A reverse mortgage is a lifetime loan using the home as collateral. Borrowers can obtain a percentage of their home value, either upfront as a lump-sum or through periodic payments or withdrawals. Interest accrues on the loaned amount, and the accumulated debt must be paid off when the borrower dies or leaves their home to move to a long-term care facility, usually via the proceeds from the sale of the home.

The main advantage of these products is that borrowers retain ownership of their home and will still be able to pass on the home equity in excess of the debt to their beneficiaries when they die. Additionally, most products do not require any interest or principal payments until the borrower moves out, so the borrower can make full use of the funds loaned to them until the home is sold. The main disadvantage is that their debt continues to accumulate over this period, and can rapidly reduce the excess equity value of the home.

The United Kingdom and the United States are the largest markets globally for reverse mortgages, followed by Australia and Canada. These products exist in some form in nearly all the jurisdictions covered in this chapter.

6.1.2. Home reversion

A home reversion is when the homeowner sells a portion or all of their home equity to a third party in exchange for a lump sum or periodic payments. The home must be sold when the owner moves out of the home or dies, and the third party receives their owned portion of the proceeds.

Unlike with a reverse mortgage, the homeowner does not retain full ownership of the home with a home reversion, though they can still retain a portion of it that can be passed to their heirs. The home equity is normally sold at a discount. However, as this is not a loan, no interest accrues and the homeowner is normally able to obtain a larger sum than they would have with a reverse mortgage.

Home reversions are more prevalent than reverse mortgages in France, Germany, Italy, and Poland (EY, 2020[1]). However, in France and Italy, the contracts tend to be between individuals rather than with a financial institution as the counterparty.

6.1.3. Sell and rent back scheme

A sell and rent back scheme involves the sale of a home, while retaining rights to reside in the home by paying regular fees to the new owner as long as the previous owner continues to occupy the home. The home is normally sold below market value and ownership fully or partially transferred, and there are also models that involve a gradual transfer of ownership.

These types of schemes exist notably in Australia, the Netherlands and the United Kingdom.

6.2. Industry standards

Home equity release products suffer from a bad reputation as people perceive them as products that take advantage of the elderly. This is due to past experience with mis-selling, high costs and the potential to lose one’s home (Mayer and Moulton, 2020[2]). This has contributed to a lack of demand for these products, as homeowners do not trust providers, and financial advisors are reluctant to recommend the products for fear of liability.

Industry-formed groups have established standards of good practice for product design to improve their reputation and ensure adequate protection. In the United Kingdom, the Home Equity Council requires that its members offer products that (Equity Release Council, 2024[3]):

• have a cap on the interest rate if variable

• ensure the right of lifetime residency

• allow for the transfer to a comparable property

• include a no negative equity guarantee that the borrower will not owe more than the value of their home equity

• allow for penalty-free repayments.

The European Pensions and Property Asset Release Group has produced similar standards. These include additional points on the competence of intermediaries and the content of product disclosures, as well as consumer protections in the case of early death or insolvency of the provider (EPPARG, 2024[4]).

6.3. Product features and implications for homeowners

Product features and the extent to which regulation imposes requirements for home equity release products vary across jurisdictions. These features include eligibility conditions to access the product, the calculation of the payout received, the calculation of debt owed, contractual rights and obligations, and how to ensure suitability. Many of the rules relating to each of these aspects have implications as to the risks that homeowners may face with these products.

These features are normally more complex and relevant for reverse mortgage products. As such, much of the discussion here will focus on reverse mortgages. However, where applicable, the discussion will also include features of the sale-type products.

6.3.1. Eligibility requirements for reverse mortgages

One advantage of home equity release products for retirees is that the eligibility requirements are generally easier to meet, because these products do not generally require income checks or credit assessments. However, there are certain criteria that individuals must meet. These include minimum age requirements, the property value or type and the individual’s relationship to it, and the outstanding mortgage remaining to be repaid. Some jurisdictions also have specific products targeted for a particular use, which may involve additional eligibility requirements.

Minimum age limits are the most common feature of reverse mortgage products, and the regulatory framework often establishes them. The youngest age allowed where limits are formally imposed is 55. This is the case in Canada, Ireland, Korea, and the United Kingdom. A minimum age of 60 is the most common, as in Australia, France, Italy, Japan, Norway and Sweden. The United States requires borrowers in its Home Equity Conversion Mortgage (HECM) programme to be at least 62, and the minimum age in Australia’s Home Equity Access Scheme (HEAS) is linked to the minimum age for the public pension. Spain requires that borrowers be 65, though Spain is unique in allowing an exception to the minimum age requirement where borrowers demonstrate 33% disability or dependency. Several jurisdictions have no formal minimum age requirements, including Germany, the Netherlands, New Zealand, Poland, and Sweden, where each provider sets the minimum age for their product.

It is more common that the regulatory framework defines a minimum age for reverse mortgages than for other types of home equity release products. For reverse mortgages, debt can accumulate rapidly over time, and younger borrowers would end up paying a large proportion of their property value in interest. Additionally, younger people are more likely to have access to more flexible and cheaper borrowing options (Financial Conduct Authority, 2020[5]). Indeed, reverse mortgage products can be rather inflexible, and younger borrowers are more likely to experience an unforeseen change in circumstances that require them to repay the loan early, which can be costly.

Reverse mortgage products use the home as collateral, therefore they often require that the mortgage is largely paid off or that the home is owned outright with any mortgage fully paid off. The Housing Pension Programme in Korea (JooTaekYeonKeum, JTYK) requires that the mortgage be fully paid off to qualify for the reverse mortgage. There may also be indirect requirements to own the home outright, through requirements to use the borrowed funds to pay off debt. Reverse mortgage products in Canada generally require that the loan proceeds are used to pay off any outstanding debt and to close any open Home Equity Line of Credit (HELOC). Home reversion in the United Kingdom requires sellers to pay off all debts as well.

There may also be restrictions around the type of property eligible for collateral behind a reverse mortgage. For the US HECM programme, borrowers must occupy the property as a principal residence. In France, the real estate must be used for housing, but residing in the home is not required, and the owner can even rent out the property with the agreement of the lender. The HEAS in Australia allows for the use of any real estate owned in Australia. In Japan, most private lenders often do not allow condominiums to be used as collateral, or impose limits on location and other conditions. In the case of single-family homes, the collateral often only counts the land on which the property sits and excludes the value of the home, resulting in lower possible amounts borrowed (Kojima, 2013[6]).

The eligibility assessment may consider the value of the property. It is common to require a minimum property value, which can also be imposed indirectly through minimum limits on the loan, as is common practice in Sweden. This can exclude lower wealth households from being eligible. The JTYK in Korea actually imposes a cap on the total value of all properties owned. If this exceeds the required threshold, owners have three years to sell the properties in excess of the threshold. This requirement is logical, as selling a property in which you do not reside is a more efficient and cost-effective way to release equity from a property compared to a reverse mortgage.

Borrowers may also be subject to other requirements. Access to the HEAS in Australia imposes residency requirements of ten years of which at least five must be consecutive. While most schemes do not impose income or credit requirements, this scheme also imposes certain asset and income tests related to the means-testing of the first pillar pension. The HECM programme in the United States has required a financial assessment of borrowers since 2015 to ensure that they will be able to cover insurance and taxes owed on the property and for upkeep of the home, which is a requirement to maintain the loan. This was in response to many borrowers maxing out the value of the loan then having to foreclose because they did not set aside funds to cover these costs.

Some jurisdictions have defined specific reverse mortgage products that require a particular use of the funds, which can help individuals with specific financial needs in retirement. In Australia, the Aged Care Loan is a reverse mortgage that aims to aid borrowers to pay for long-term care costs without immediately having to sell their home. The loan is for a maximum term of five years and provides flexibility to seniors who require care to have more time to sort out their finances. Japan also has a reverse mortgage targeted to cover long-term care expenses since 2007. The loan can serve as a mechanism to reduce the assets of the individual and allow them to become eligible for public assistance. France introduced a loan in 2022 targeting low-income households who require home renovations relating to energy use. Local and non-profit agencies in the United States offer single-purpose reverse mortgages at lower rates that must be put toward an approved use. Such targeted programmes can provide an additional source of financing for individuals having specific financial needs in retirement.

6.3.2. Calculation of benefits

The amount of home equity that homeowners can release with home equity release products is typically a function of their age and property value. The product agreement should also define the timing and size of the benefit payments to be made.

Reverse mortgages

The maximum amount that homeowners can borrow with a reverse mortgage is commonly expressed as a loan-to-value (LTV) ratio, so as a maximum percentage of the value of the home. The percentage allowed generally increases with age. This is to mitigate the risk that the outstanding balance of the loan will eventually exceed the property value, meaning that the sale of the home would not generate sufficient funds to fully pay off the loan. Indeed, the United States introduced borrowing limits in 2014 following the financial crisis when property values fell, often below outstanding loan values.

Maximum LTVs vary across countries, but are generally between around 15% for younger borrowers and 50% for older ones. LTVs are usually quite low for younger ages. One product in Sweden and the Spry product in Ireland offer 15% at age 60, and in Australia the maximum LTV for someone aged 65 is around 20-25%. These percentages increase with age up to a maximum of around 50%. Canada imposes a maximum LTV of 55%, which is also the maximum LTV for the only product offered in the Netherlands. One product in Sweden increases the allowed LTV up to 45% at age 90, while Norway caps the LTV at 49% at age 80. The Spry product in Ireland has a relatively low maximum LTV, at 40% for ages 85 and over.

In addition to age and current property value, other factors can influence the LTV ratio. In Norway, the LTV will depend not only on the current value of the property, but will also consider the housing market and expectations regarding its future appreciation. The sum will also be reduced if the debt is held jointly in a housing cooperative. In the United States, HECM limits also vary by area. The United Kingdom is unique in offering underwritten reverse mortgages, which offer higher LTVs for those in worse health and/or with lower life expectancies. In Australia, maximum loan amounts in the Home Equity Access Scheme are related to the public means-tested pension benefit to which an individual is entitled (age pension). The sum of the public pension and loan payments must be below 1.5 times the maximum rate for the public pension. In Germany, providers can deduct expected maintenance costs from the total amount.

Some reverse mortgage products allow younger borrowers to increase their loan amount at a later stage. In Australia, HEAS borrowers can request an increase in the LTV that corresponds to their age, to the extent that the accumulated outstanding loan amount remains lower than the allowed amount. In Sweden, one product allows borrowers to increase their borrowing limit if their home equity goes up by a minimum amount, for an additional fee.

Several reverse mortgage products also impose absolute minimum and maximum loan amounts. In Canada and the Netherlands, the minimum loan is CAD 20 000 and EUR 30 000, while the maximum amount is CAD 750 000 and EUR 250 000.

Home equity release products can structure payments in a variety of ways. There are generally four ways to pay out the borrowed amounts from a reverse mortgage to the borrowers. The first is a lump sum, where borrowers receive the maximum loan amount all at once. Depending on what the borrowed funds are used for, lump sum payments can be disadvantageous for the borrower because they will owe interest on the entire amount from inception. If they intend to use the funds gradually to finance expenses over retirement rather than, say, pay off debt or finance home improvements, they will end up paying interest on the money that is sitting in their bank. The second option is to pay a fixed annuity, whereby the maximum loaned amount is dispersed over a fixed number of years. This will provide the borrower a regular income and lower the total interest owed, but it will not provide an income for life so they will see their finances decrease after the fixed term ends. The third option is a line of credit, where the borrower can withdraw money against the maximum loan amount as they need it. This minimises the interest paid, because the borrower will not owe interest on funds they have not used. The flexibility, however, may come at an increased cost (i.e. higher interest rates) as the lender will have more uncertainty around the expected cash flows and projected accumulated loan. Finally, the products can pay a life annuity, whereby the lender pays a regular fixed amount until the borrower dies. This is most useful to provide a regular income in retirement and protect the borrower from longevity risk, but again may come at a cost as it also increases the risk exposure to the provider. Table 6.1 summarises the options available.

Table 6.1.  Payouts possible from equity release products

Country	Reverse mortgage				Home reversion			Sell and rent back
	Lump sum	Fixed annuity	Line of credit	Life annuity	Lump sum	Fixed annuity	Life annuity	Lump sum	Fixed annuity
Australia	x	x	x		x			x	x
Canada	x	x	x
France					x		x
Germany	x	x			x
Hungary					x		x
Ireland	x				x
Italy	x	x			x		x
Japan	x	x	x
Korea	x	x		x
Netherlands	x	x						x
New Zealand	x	x				x
Norway	x	x
Poland	x	x
Spain	x	x		x	x		x	x
Sweden	x
United Kingdom	x	x	x		x			x
United States	x	x	x	x

All reverse mortgage products allow borrowers to take their funds as a lump sum, in full or in part. Some products impose limits on the amount of lump sum. In Australia, the HEAS allows a maximum lump sum of 50% of the public pension benefit over one year. The JTYK in Korea allows a lump sum of up to 50% of the total amount borrowed. Other products impose a minimum lump sum at inception. In the Netherlands, borrowers must take a minimum lump sum of EUR 4 500. In New Zealand, they must take a minimum of NZD 5 000. Lump sums are the only option in Ireland and Sweden.

Fixed annuity payments of borrowed funds are quite common. This is an option for the HECM in the United States, which can be taken only as a fixed annuity or combined with a line of credit. Private products in Japan can also be taken as a fixed annuity or line of credit. In New Zealand, funds can be paid out over ten years. In Korea, borrowers can opt for fixed terms of 10 to 30 years for the Housing Pension. One product in Germany, which is no longer on the market, offered the option of paying a fixed annuity up to the average life expectancy. In Australia’s HEAS, regular payments are paid until the maximum loan amount is exhausted. If the borrower opts for a lump sum, their payments are reduced accordingly over the next year. In the Netherlands, the Florius product requires borrowers to set their borrowing duration at inception, over which regular amounts will be paid. Previously, they required that the borrowed amounts be fixed, but they now allow borrowers to make adjustments to the amounts.

Lines of credit are less common, potentially because of the additional uncertainty around the total loan amount and the timing of cash flows.3 Lines of credit are available in Canada, Japan, the United Kingdom, the United States – where it can be combined with an annuity – and from private providers in Australia, though not through the HEAS programme. There can be minimum limits on the size of each transaction in a line of credit arrangement, as is the case for private providers in Australia.

Life annuities are not commonly offered. This is an option only in Korea, Spain, and the United States. In Spain, borrowers with outstanding mortgages have two options. The first is to receive a capital sum from the lender, and when they eventually manage to pay off their mortgage the lender will pay them a small dividend payment for life. Alternatively, dividend payments can begin immediately and go towards paying off the outstanding mortgage. When it is paid off, the dividends will then be paid to the borrower for life (Alegria Real Estate, 2021[7]). In Korea, the government acts as the lender, thereby bearing the underlying longevity risk of the transaction.

Home reversions

The standard home reversion product pays the full or partial purchase price of the home as a lump sum. However, some products may distribute the purchase price over time via a fixed term or life annuity. The product offered by Lifetime in New Zealand pays an income over ten years, with an option to extend for another ten years if the seller is under age 90, thereby gradually transferring the home equity to the product provider over time. An alternative model is common in France and Italy, where two individuals enter into a home reversion transaction. With this model, the owner fully sells their home to the buying individual, either via a lump sum or a combination of a lump-sum payment and a lifetime annuity payment, while retaining the right to reside in the home for life.

Sale and rent back schemes

The payments from sell and rent back schemes come in a variety of designs. In Australia, proceeds from the partial sale of the home can be paid out as a lump sum or in instalments. The seller then pays ‘rental’ fees to the buyer as a percentage of the buyer’s equity in the home, which serve to transfer that additional equity to the buyer. As such, the transfer of equity accelerates over time as the payments by the seller increase. In the Netherlands, the Verzilvermijvast product pays 50% of the home value as a lump sum to the seller. The seller then pays 6% of the house value annually. When the seller moves out or dies, Verzilvermijvast makes a final payment of 50% of the difference in the home value. As such, Verzilvermijvast shares the profits and losses from the variation in the home’s value with the seller.

Home reversions and sell-and-rent-back schemes can provide rebates in the case that the seller dies or sells their property early, though they are not normally required. Lifetime’s home reversion product in New Zealand will reduce the acquired equity accordingly if the home is sold before the ten-year fixed annuity is fully paid out. In both Australia and the United Kingdom, products can provide a rebate to heirs if the seller dies earlier than expected. In Germany, providers may pay a lump sum or a fixed term annuity to compensate for the unused right of residence (Joosten, 2015[8]).

6.3.3. Calculation of debt for reverse mortgages

The calculation of the outstanding debt for a reverse mortgage product depends not only on the amount borrowed and the timing of those payments, but also on the interest rates and any early repayments the borrower makes. Some products may offer equity guarantees to cap the amount of debt that can accumulate.

Interest rates can be fixed or variable. Fixed rates are set at the inception of the contract, and remain constant for the life of the product. This limits the risk to homeowners of increasing the amount of their accumulated debt beyond expectations. Products offered in France, Germany, Italy, the Netherlands, Spain, and the United Kingdom have fixed interest rates. The majority of products in Canada also offer fixed rates. Germany is unique in that providers are not allowed to charge compound interest, so interest is only charged on the initial principal value. This limits the debt that homeowners accumulate over time compared to products that charge compound interest. Variable rates depend on prevailing market conditions. Good practice laid out in the standards set by industry bodies indicate that providers should offer a cap on the interest rate to protect the homeowner from very high interest rate charges that could more quickly erode their remaining equity value. Products offered in Korea, New Zealand, Norway, Poland, and Sweden have variable interest rates, and the majority of products in Australia, Ireland and the United States are variable as well. HECM products in the United States only offer fixed rates for products taken as a lump sum, and variable rates for payments made over time.

Interest rates for reverse mortgages are normally materially higher than rates offered for traditional mortgages. This is to compensate the provider from the additional uncertainty around when they will get their money back and from the risk that the home value will fall below the outstanding loan balance, often referred to as crossover risk. In exchange, however, the homeowner is not normally required to make any repayments on the loan, and reserves the right to reside in the house until death or when they move to a care facility.

Most providers allow borrowers to make early repayments on the loan, albeit often with some fee attached to compensate for the loss of interest accrued. HEAS loans in Australia allow repayments anytime, but private providers often require that the maximum agreed loan be paid out before any voluntary payments can be made. In France, early repayments are subject to a cap on the fees charged.

Some products may require borrowers to make interest payments. This is common, notably in Japan. One product that is no longer offered in Germany presented a unique, though complex, structure requiring repayments to mitigate crossover risk. The loan amount was divided into three parts. The first part was paid to the borrower. The second part was set aside to pay borrowers an income once they had reached their borrowing limit. The third part was used to pay down interest and finance mortgage insurance (Bartsh et al., 2021[9]).

It is common good practice for products to offer no negative equity guarantees (NNEGs). These limit the borrower’s liability to the value of their property, effectively meaning that the loan is a non-recourse loan.4 NNEGs are required in Australia, Canada, France, Italy, Korea, and Norway. In the United States, the government provides this guarantee for HECM loans by purchasing the loan from providers once the balance exceeds 98% of the maximum claim amount (Baily, Harris and Wang, 2019[10]). In the United Kingdom, members of the Equity Release Council are required to provide NNEGs, even though it is not legally required by the state. In Poland, reverse mortgages are also non-recourse even if they do not technically offer an NNEG. After the borrower’s death, the home is transferred to the lender to sell, who is then required to reimburse the heirs the excess of the sale proceeds over the outstanding loan balance. In the other jurisdictions the NNEG is available for some products, though not mandated, except in Germany where providers do not currently offer it and in Spain where it is not available.

While the provider normally guarantees a non-recourse NNEG itself, a few jurisdictions differ. In the Netherlands, the only product available offered by Florius provides a conditional NNEG. The guarantee holds only when the house is sold at full market value. In the case that the house must be sold for less, the heirs will still owe the difference between the market value and the selling price. In the United Kingdom, the Equity Release Council provides the NNEG insurance, which the providers finance directly. In the United States, it is the homeowner who explicitly bears the cost of the insurance for a HECM loan, which is 2% up front and 0.5% annually. The insurance is provided by the government and ensures that the borrower will receive their funds if the lender is unable to make payments. Similarly in Korea, borrowers of JTYK loans must pay a premium to the government for the NNEG. In Japan, the Reverse60 programme provides homeowners with the option to have a non-recourse loan, in which case they must pay a higher premium and the risk is insured by the government. Private providers in Japan rarely offer a NNEG.

The no negative equity guarantee is an important feature from a consumer protection standpoint, as the combination of compound interest and the risk of declines in the housing market mean that the crossover risk is material. The risk that the home value falls below the outstanding loan balance could leave beneficiaries with significant debt to repay even after the sale of the home used as collateral. Indeed, several jurisdictions, including Australia and the United States, mandated NNEGs following the collapse of the housing market during the financial crisis, which led to numerous cases of debt exceeding home values. Following the mandate, Australia noted conservative loan values offered to homeowners (ASIC, 2018[11]).

The NNEG limits the loss of equity to the value of the home, but some providers also offer an equity guarantee to ensure that the borrower will retain a certain percentage of equity in their home. This can be a valuable feature, particularly where individuals may rely on their home equity to finance the costs of long-term care. The Australian Securities and Investments Commission estimated that 63% of reverse mortgage borrowers in Australia were at risk of not having enough equity remaining in their home by age 84 to pay for aged care (ASIC, 2018[11]). Equity guarantees are available in Australia, the Netherlands, and New Zealand.

6.3.4. Contractual rights and obligations

The contractual terms of the product must lay out the various rights and obligations of the homeowner and the conditions to terminate the product. These include the costs and fees that the homeowner must cover, their right to exit the contract, the obligations to maintain the property, rights for lifetime residency and tenancy protections, the ability to transfer the contract to a new property, the delay allowed to transfer owed funds to the provider, and insolvency protection for the homeowner.

Although equity release products normally do not require ongoing payments, there are normally upfront costs that the homeowner must bear. However, the transaction itself can incorporate some of these costs by adding them to the loan value or reducing the benefit transferred, so homeowners do not necessarily feel the full initial costs of the product. Homeowners are normally obliged to cover all costs relating to the establishment of the contract. This often includes an initiation fee, an ongoing servicing fee, and any third-party charges such as the valuation of the property, inspections, and the like. The United Kingdom requires reverse mortgage borrowers to engage an independent solicitor to complete all the legal work, and in France, they are required to consult with a notary. Some jurisdictions may have restrictions in place to limit the level of fees that providers charge, as is the case for HECM loans in the United States for the origination fee and servicing fees. Origination fees are capped at USD 6 000.

Several countries require that providers give homeowners time to change their mind about signing the contract. Such cooling-off periods are normally around 30 days, and are required in Canada, France, and Poland.

Conditions of the contract normally require homeowners to meet all tax obligations, insurance premiums (e.g. fire, flood), and ensure the normal maintenance of the home. These requirements help to prevent avoidable depreciation of the property value, which would present an increased risk to the provider of not receiving their expected funds. Not fulfilling these obligations can be grounds for early termination of the contract and the forced sale of the home. A few countries have specific measures in place to enforce this upkeep. To apply for a HECM loan in the United States, borrowers must demonstrate that they have sufficient funds to cover the expected costs. In Germany, funds can be put aside for this purpose. In Sweden, homeowners must allow for regular inspections to ensure the upkeep and maintenance of the home. Apart from failing to upkeep the home, other reasons for early termination of a reverse mortgage contract in Canada include using the money for something illegal or lying on the application. In Poland, any decline in property value that is the fault of the resident can trigger the termination and early repayment of the loan. In Japan, some private providers require repayment if the value of the property falls below the outstanding loan amount, even if this is a result of market fluctuations outside of the homeowner’s control. This last example clearly presents a serious risk for borrowers of being kicked out of their homes. Australia introduced a measure to protect homeowners in breach of contract that requires providers to speak directly with the borrower and provide them with a notice period before enforcement proceedings to obtain the loan repayment.

The ability to continue to reside in one’s home for life is one of the big draws of equity release products for the elderly, and indeed standard practice is to provide a lifetime residency guarantee. However, this is not always the case. In New Zealand, there is no requirement for reverse mortgage providers to offer such a guarantee. In the United Kingdom, only the members of the Equity Release Council are bound by its standards, which include that providers ensure the right of lifetime residency. Sell and rent back schemes in the United Kingdom do not provide a right to lifetime residency, and in Australia schemes that gradually transfer the equity to the provider may not necessarily allow residents to stay in the home if their retained equity falls to 0%.

While the homeowner taking out the equity release product normally has the right to lifetime residency, this is not necessarily the case for spouses or other residents of the home. Typically, the people who are on the title of the home will be included in the right to lifetime residency. However, if only one spouse is on the title, the other spouse will not automatically be covered, and in most jurisdictions, there is no obligation for any tenancy protection for other residents in the home. This presents a large risk that surviving spouses could get kicked out of their home when the spouse holding the contract dies. To compound this risk, minimum age requirements usually apply to the youngest age on the contract, so someone with a younger spouse may not even be eligible to apply. In the past, this has occasionally led to the poor advice to remove the younger spouse from the title to be eligible to obtain the product. To address this risk, Australia requires that providers of reverse mortgages that do not include tenancy protections provide a warning to homeowners about the potential consequences, but they also found that this warning was not necessarily effective. Private providers in Japan tend to use trusts, which allows surviving spouses to stay in the home and continue to make use of the reverse mortgage. Since 2014, HECM loans in the United States have provisions in place to cover eligible non-borrowing spouses.

Usually, the contract terminates when the homeowner dies, moves to a care facility, or sells the home. At this point, any outstanding loan must be paid off, or the proceeds from the sale of the home to which the provider is entitled transferred. However, some jurisdictions allow individuals to transfer their reverse mortgages to their new property when they sell their home, providing that it meets the same requirements that the original home met, including the property value. This is possible in Canada, Ireland, and the United Kingdom.

Normally, providers allow for a certain period of time following the exit of the property to sell the property (and/or repay the loan). This is usually around 12 months. However, the grace period may differ depending on the cause of the exit. In Canada, the delay allowed may be longer in the event that the resident moves to a long-term care facility.

A final reason for the termination of a contract can be the insolvency of the provider. Most jurisdictions do not have protections in place to make homeowners whole in the event of a default. Where this does exist, the government acts as the guarantor. This is the case for HECM loans in the United States and the JTYK in Korea.

6.3.5. Ensuring suitability

Many jurisdictions have established measures to help to ensure that adequate protections are in place and that the product is suitable for the individual taking them.5 Equity release products are very long-term and complex products which can provide a sizable payment to homeowners, with comparatively little direct cost for them or ongoing payment obligations. It can therefore be difficult for homeowners to fully understand the potential consequences that the product could have for them twenty or thirty years in the future, and for them to assess the potential risks.

Disclosure is one approach to promote understanding, though alone it is generally not sufficient. Australia requires reverse mortgage providers to disclose home equity projections using the government’s MoneySmart calculator and a warning of the risks if the product does not offer tenancy protection. The United States requires fee disclosures.

Legislation may also require providers to take steps to assess whether the product may be suitable for the borrower. The enhanced responsible lending obligations introduced in Australia include a requirement for the provider to assess the future needs of the borrower, not only their current situation, to make sure they are aware of the long-term consequences that the product could have on their financial situation. Providers are also subject to maximum LTV limits for the product to be considered as suitable. Since 2015, lenders for the HECM programme in the United States must make a financial assessment of borrowers to ensure they will be able to meet ongoing costs relating to the care and upkeep of their property. The United Kingdom requires providers to take ‘reasonable steps’ to ensure that the product is suitable. However, the Financial Conduct Authority found that this assessment is often treated as a box-ticking exercise (Financial Conduct Authority, 2020[5]).

A particular concern with these products that target elderly individuals is that they are at higher risk of having cognitive decline and may not be capable of fully understanding the product and its implications. To mitigate this risk, the United Kingdom requires that an independent solicitor certify that the person making the decision to take the product is competent to do so. Providers in France face marketing restrictions, and are prohibited from using certain tactics such as door-to-door sales that the elderly could be vulnerable to. The higher potential for cognitive decline also raises the risk of elder abuse, where relatives or other people close to the individual may convince them to enter an equity release agreement in order to take advantage of the financial gains they will subsequently receive. ASIC found that providers in Australia were not doing enough to watch for signs of elder abuse. These signs include repayments being made by an adult child, money transfers to a non-borrower, money transferred to a child, the involvement of children in the application process, non-borrowers affirming that they received the required financial advice, or any file notes indicating abuse by a sibling. Nevertheless, providers often have indirect safeguards in place, including limiting the power of attorney where non-borrowers may benefit, and only disbursing money into the borrower’s account (ASIC, 2018[11]).

Some jurisdictions go further in ensuring suitability and require that potential borrowers of reverse mortgages to obtain counselling or financial advice. Independent financial advice is required in Canada (in some provinces), New Zealand, Spain and the United Kingdom. While not required, some providers in Australia and the only provider in the Netherlands require financial advice. Japan and the United States take a lighter touch, requiring a meeting with a counsellor to explain considerations around eligibility and suitability, and other options that may be available to the individual. Such information sessions do not provide advice, rather they aim to ensure the homeowner is sufficiently informed. A requirement to obtain financial advice may not always be sufficient, however, to ensure the suitability of a product. The FCA found that advisors in the UK receiving a request for the required advice from an individual wanting the product did not sufficiently challenge the individual regarding whether the product was suitable for them (Financial Conduct Authority, 2020[5]). In Australia, advisers have been reluctant to provide guidance about equity release products for fear of liability, given the prevailing negative perceptions around the products (ASIC, 2018[11]).

An important consideration in assessing suitability is the potential impact to means-tested benefits and taxes owed that the payout from these products could have. Equity release payouts can affect an individual’s eligibility for means-tested benefits in Australia, Sweden, and the United Kingdom because the means-test considers home equity differently from liquid assets. ASIC found that providers in Australia were not providing sufficient warnings to individuals about the potential impact on their public pension benefits (ASIC, 2018[11]). Taxes owed are another consideration. While payouts from reverse mortgages are not normally taxable as they are treated as loans, home reversions can incur additional capital gains tax. However, some jurisdictions do provide tax benefits for equity release products. Korea provides a tax credit for reverse mortgages that reduces the borrower’s property tax by 25%. Italy provides exemptions from stamp duty and property tax. In Ireland, Spain, and the United Kingdom, home reversion payouts are exempt from tax. In the United Kingdom, reverse mortgages can reduce inheritances taxes owed when the individual dies, as this tax considers wealth net of debt.

6.4. Supply side barriers and risks

There are many barriers for providers to enter and stay in the equity release market. As a result, markets tend to be very small and concentrated in most jurisdictions. Some of these barriers include capital requirements, as well as the various risk exposures from these products including property prices, interest rates, longevity, and reputational risk. Several jurisdictions have introduced government-backed programmes to address these supply-side barriers.

In many jurisdictions, the equity release market remains very small and concentrated among a few providers. In Australia, two competitors wrote 80% of the market during 2013-2017 (ASIC, 2018[11]). Similarly, two providers dominate the New Zealand market. and there is only one product available in the Netherlands, offered by Florius Verzilverhypotheek. In Germany, there were only 200 reverse mortgages outstanding in 2015 (Bartsh et al., 2021[9]). HomeEquity Bank was the sole seller of reverse mortgages in Canada until recently.

One reason for the small number of providers is the high barriers to entry that companies face, particularly with respect to the required capital. Starting in the business requires a very large amount of upfront capital, which the provider will not normally receive back until decades later. Lenders can have difficulty to access wholesale funding. Indeed, the availability of funding has been the largest challenge for providers in the equity release market (EY, 2020[1]). This has also led existing providers to terminate their business. For example, Seniors Money in Ireland could no longer raise funds during the financial crisis, and had to stop writing new business. Another barrier relating to capital is that such products require more Tier 1 capital, which can be a disincentive for providers to enter the market (ASIC, 2018[11]). Where the provider is subject to risk-based capital regimes, requirements to protect them against such long-term risks can be expensive.

Providers entering the market also have numerous risks they need to manage and mitigate, one of the most significant being the uncertainty in property prices. For sale-type products, a drop in home values will reduce their profits once they are able to sell the home. For reverse mortgages, a drop in home values increases the risk of crossover, where the accumulated loan value could exceed the proceeds obtained from selling the home. For products with a no negative equity guarantee, this would result in a loss for the providers or for the institution or entity insuring the guarantee. Indeed, several providers stopped business following the financial crisis when property values dropped. There were 20 lenders in Australia before the crisis, and now there are only 3 (Knaack, Miller and Stewart, 2020[12]). The market in Ireland significantly shrunk after the crisis as well, and completely dried up in Hungary. In the United States, many reverse mortgage loans triggered the no negative equity guarantee during the crisis, and the Department of Housing and Urban Development, who insures the programme, had to raise premiums and reduce borrowing limits as the HECM programme was running on a loss.6 While widespread shocks to the housing market are difficult to mitigate, providers generally address normal risk levels through eligibility requirements and due diligence on the housing type, its construction, as well as its location.

Providers also face moral hazard with respect to homeowners’ willingness to ensure the maintenance of their home value. The elderly may be less engaged in the maintenance and upkeep of their homes, particularly when they will have no financial gain from doing so. Reverse mortgage providers usually include provisions requiring that the occupant of the home maintain its upkeep as a condition for keeping the loan, which mitigates this risk. Where a no negative equity guarantee is offered, providers need to also mitigate the moral hazard that the heirs will sell the home at a discounted rate, for example to a relative, which would result in losses to the provider. The Netherlands mitigates this risk by requiring that the home be sold at market value for the no negative equity guarantee to apply. However, this puts additional risk on the heirs, who may not be able to sell at market value within the window in which the lender requires repayment.

Interest rate risk is also a factor reverse mortgage providers need to mitigate. Providers face a contradictory problem with respect to setting the interest rate for their products. On one hand, higher rates increase the crossover risk that the accumulated debt will exceed the value of the home. On the other hand, higher interest rates also compensate providers from bearing this risk, so they need to balance these two considerations. More recently, low interest rates have also reduced profitability of writing these products. Providers can also face basis risk between the mortgage rate and their financing rate, particularly when one rate is variable and the other fixed. This risk can be mitigated with interest rate swaps, however.

Providers of home equity products face significant uncertainty regarding future cashflows because equity release products are for the lifetime. As such, providers cannot be sure as to when the home will be sold and they will recoup their investment. Lifetime annuities as a form of payment increase the longevity risk that providers face, because not only will they risk waiting longer than expected to receive repayment, but they would also have to make payment for a longer period of time. As a result, very few providers offer lifetime annuities as a form of payment.

Licensing requirements for providers to be able to offer equity release products may also explain the lack of lifetime annuity options as a form of payment. These products are typically offered by banks or credit agencies, whereas often only insurance companies are licensed to provide lifetime annuity payments. As such, either the provider would have to be an insurance company or partner with an insurance company.

Finally, providers entering the market need to be very careful about managing reputational risk and how they communicate about these products. Given the past issues relating to a lack of protections, such as the no negative equity guarantee, and high costs, the public’s perception of these products tends to be negative and there is a lack of trust of providers. Reputational risk is compounded by the fact that these products tend to be difficult for the general public to understand, and therefore can be seen as products that take advantage of the elderly, particularly when there is no remaining home equity at the end of the contract. Such situations can also lead to disputes with heirs. This has been a problem in Italy, for example (Hoekstra et al., 2018[13]). To mitigate the risk of disputes, the United Kingdom keeps the assessment from the independent solicitor on file as proof that the homeowner was competent in choosing to select the product. In Japan, most providers require the use of a trust which allows them to avoid dealing with any heirs in the termination of the contract.

Several jurisdictions have developed government backed equity release programmes given the challenges to develop a private market. Australia Government’s Home Equity Access Scheme is provided by Services Australia and the Department of Veteran Affairs. The programme provides a reverse mortgage up to a limit linked to public pension eligibility, and is paid fortnightly until the allowed loan amount has been fully paid out. Some municipalities in Hungary offer a home reversion equity release scheme which pay a lump sum and monthly lifetime payments in exchange for homes (Hoekstra et al., 2018[13]). Japan’s Reverse60 programme offers retail reverse mortgages to homeowners that are underwritten by the Japan Housing Finance Agency and which pay a lump sum. Korea introduced its JooTaekYeonKeum (JTYK, Housing Pension) in 2007 through the Korea Housing Finance Corporation, which provides lifetime monthly payments to the reverse mortgage borrowers. The Home Equity Conversion Mortgage (HECM) was created in 1988 in the United States. Loans from this programme are available through any Federal Housing Administration (FHA) approved lender and are insured by the government. The HECM programme services over 90% of the reverse mortgages in the American market (Baily, Harris and Wang, 2019[10]).

6.5. The use of home equity release products in retirement

Home equity release products have the potential to benefit retirees in many situations. Common uses for the funds generated from these products include paying off debt, covering large punctual expenses such as home repairs, general improvement in living standards, and as a funding of last resort particularly for long term care needs.

Home equity release products can be beneficial for individuals retiring with high outstanding debt. Indeed, a common use of funds obtained from an equity release product is to pay off or manage debts. This is the case in the United Kingdom as well as Japan where homeowners use them to refinance their loans (Financial Conduct Authority, 2020[5]; Rethink Tokyo, 2022[14]).

Home equity release products could also be a good way for individuals to finance necessary punctual costs that they may not be able to budget for with their regular income or savings in retirement. Home improvements, for example, are another common use for these products. France has a product specifically targeting those with lower means who would like to use the funds for home improvements (Rialland, 2023[15]). In the United Kingdom, the FCA found that equity release products could be a helpful solution to help individuals to finance early or gradual retirement (Financial Conduct Authority, 2020[5]). These products could be a source of bridge financing to help people manage the period during which they may not have access to all their eventual sources of income in retirement.

Home equity can also simply be a means to improve living standards more generally. HECM loans have a high penetration among the low-income groups in the United States (Knaack, Miller and Stewart, 2020[12]). In contrast, in Korea JTYK loans are more common among individuals in high-rise housing, which tend to be owned by wealthier individuals (Clow, 2020[16]). In Italy, people view these products as an option to improve living standards where income is not sufficient to meet basic needs, rather than as a means to simply live more comfortably (Fornero, Rossi and Urzi Brancati, 2015[17]). Equity release products could be particularly helpful for the single elderly and surviving spouses, especially women, who have on average fewer financial resources in retirement and may have seen their retirement incomes decrease following the death of their spouse. Indeed, in the United States nearly two-thirds of HECM borrowers are single, with around 70% of those being women (Knaack, Miller and Stewart, 2020[12]). Some have suggested that line of credit reverse mortgage products could be a way for retirees to manage sequencing risk. Specifically, individuals could rely on the line of credit during periods of negative returns to avoid locking in their losses and harming their future retirement income potential (Pfeiffer, Salter and Evensky, 2012[18]).

Housing is often used as a source of financing of last resort to help in covering financial shocks that individuals are not able to easily absorb, such as long-term care or divorce. Australia has a product targeted specifically to those needing long-term care to aid individuals to manage their finances during the transition to a long-term care facility and allow for more time for these individuals to sell their homes. Home equity release products also have the potential to be a means to absorb larger shocks when continued residence in the home is required or desired. In the event of divorce, for example, one partner could stay in the home, while the other partner could put the proceeds from the equity release product towards a second home.

Nevertheless, where housing equity is needed as a financing of last resort, the use of equity release products for other purposes could result in a lack of funding to help people when they have no other options, as is often the case for long-term care. This was a concern ASIC raised in the Australian market, where it found that a significant portion of individuals having reverse mortgages risked not having sufficient funds to pay for the average upfront cost of aged care (ASIC, 2018[11]).

Home equity release products also tend to be rather inflexible, which may make it more difficult for individuals to adapt their finances to changing circumstances. This risk is higher for younger borrowers who have a longer period of time over which their circumstances could potentially change.

These products can also impede downsizing. If the individual wishes to sell their house and purchase another, they would not have as much home equity available to do so. A more efficient solution to release home equity would be to downsize as early as possible and obtain the excess capital directly without going through an equity release product, which could still be obtained at a later stage if needed.

While equity release products have the potential to help people meet their financial needs in retirement in certain circumstances, many people are not aware of these products, and even if they are, numerous barriers for uptake remain. First is the poor reputation of these products and prevailing lack of trust in the financial providers who offer them. Individuals may be reluctant to enter a reverse mortgage contract due to debt aversion, as many have spent most of their lives paying off their mortgage and may not feel comfortable taking on the debt again. People often have emotional attachments to their homes, which may diminish their willingness to enter a home reversion, or to accept that they would have less – or potentially no – home equity to leave to their heirs. Access to financial advice is also a challenge in many jurisdictions, and individuals who could benefit the most from these products may not seek them out or be able to obtain advice. When they can access advice, advisors may be reluctant to advise these products for fear of regulatory liability.

6.6. Conclusions

Home equity release products can be a useful means for many retirees who own their homes to increase their financial resources in retirement. Nevertheless, the regulatory framework around these products needs to ensure their suitability and control for the potential risks to homeowners while also considering the need for providers to manage their risks. This section summarises some implications for the regulatory framework around home equity release products based on the international examples discussed. These observations relate to the profile of homeowners who are most likely to benefit from these products, ensuring the suitability of the product, good practices in product design and contractual terms, and the supply-side challenges to offer these products.

6.6.1. Homeowners who could benefit from equity release products

Home equity release products can be a valuable additional source to finance individuals’ needs in retirement, but they are not suitable for every situation. Products should target individuals who would be most likely to benefit from them.

Home equity release products are most beneficial for older individuals who would like to continue living in their current home for the rest of their life. As such, equity release products are not likely to be suitable for those who plan to downsize at some point, as they can limit the flexibility to change homes and would reduce the value that people would get from the sale of their property. Younger retirees are more likely to have a change in circumstances that could require them to change homes, making the suitability of an equity release product more uncertain. Additionally, reverse mortgages are relatively more costly for younger retirees because the debt accumulates over a longer period of time, reducing the amount of equity they are able to release with the product.

Equity release products can be particularly valuable for homeowners who need additional financial resources in retirement. Using home equity to pay off outstanding debt can reduce essential income needs in retirement. Home equity can also help retirees to absorb expenses that they may not be able to afford otherwise, such as home repairs. It can also provide individuals with a source of financing of last resort to support extraordinary expenses such as long-term care or divorce.

Home equity release products are better suited for those who do not prioritise leaving their home as a bequest to their heirs. These products reduce the home value that can be left to heirs, either by increasing the debt that heirs will need to pay off or by reducing the owned equity in the home, thereby reducing the value of the bequest.

6.6.2. Ensuring suitability

The regulatory framework should include measures that help ensure that the products are suitable for the homeowners accessing them. These include requirements for advice or guidance, required disclosures of relevant information, and the possibility for homeowners to reflect on whether their decision is the right one.

Several jurisdictions require the involvement of an independent professional for an individual to acquire a home equity release product to help to ensure that the product is suitable. The role of these professionals can be to ensure that the individual understands the product and its financial implications, to assess whether the product is suitable given the individual’s financial situation, or to verify the competence of the individual to make an informed decision in their own best interest. These professionals can also serve to flag any sign of potential elder abuse, where a family member or acquaintance may be pressuring the individual to take an equity release product in order to take advantage of them.

Product disclosures should ensure that individuals are aware of the financial implications of taking a home equity release product and have the information needed to be able to assess whether the product is suitable for them. Good practice for disclosures for reverse mortgages is to include projections of the accumulated debt and home value to help individuals understand how much excess home equity would remain in the future. Disclosures should also be sure to highlight any potential tax owed from the proceeds of the equity release product, as well as the impact it could have on other means-tested benefits that retirees receive.

Some jurisdictions require that equity release products allow for a cooling-off period to give individuals the time to reflect on their decision on their own time and change their mind about taking the product if they decide that it is not right for them. The duration of these periods is typically around 30 days.

6.6.3. Good practices for product design

While home equity release products have the potential to improve retirement outcomes for certain groups, they can also present significant risks to homeowners. The regulatory framework should aim to mitigate these risks and minimise any potential harm. Industry groups have already come up with numerous good practices in product design that regulatory frameworks can borrow from, and international experience provides additional examples of product features that can be beneficial for homeowners.

Home equity release products should provide tenancy protections that allow for individuals to remain in their homes for their remaining lifetime. Indeed, this is one of the main draws of home equity release products, and prevents people from losing their home in old age. Ideally, declared spouses should also be granted the right to lifetime residency, even if they are not on the contract for the equity release product or on the title of the home. If these protections are not granted, spouses could lose their home without having any means to relocate to a new home. Simply disclosing the consequences of not having tenancy protections for spouses is not always effective at getting people to understand them. A couple of jurisdictions take measures to allow for this protection, either through the use of trusts or specific provisions in the regulation.

Other product features limit the debt that borrowers of reverse mortgages accumulate, including interest rate caps, limits on the debt owed, penalty-free repayments, and allowing for multiple disbursements of funds. Where interest rates are variable, industry good practice is to introduce a cap on the interest rate to limit how much debt can accumulate over the borrower’s lifetime. A very important product feature to protect borrowers is the no negative equity guarantee (NNEG), which makes the loan non-recourse by preventing the lender from requiring heirs to pay back debt in excess of the home value. An equity guarantee is a similar feature that is available in some jurisdictions, and guarantees that the owner retains a minimum percentage of equity in their home. This feature is useful where home equity can be an important source of financing for long-term care needs, and prevents borrowers from exhausting their available home equity and losing that source of financing of last resort for significant financial shocks. Industry standards also allow for penalty-free repayments if borrowers choose to reduce their debt levels by repaying part or all of their reverse mortgage. Finally, another useful feature is to allow individuals to receive their payments over time rather than only as a lump-sum. This prevents debt from accumulating on a sizable lump-sum that individuals may not need immediately, and instead allows for a disbursement of payments over time as income or as a line of credit for borrowers to use as needed.

6.6.4. Good practices for contractual terms

The contractual terms of home equity release products should ensure that homeowners will have adequate protections and will be treated fairly regarding the receipt and repayment of funds.

Some jurisdictions ensure that homeowners are guaranteed to receive the amounts they are contractually entitled to even if the provider goes insolvent. This is normally insured by a government-backed guarantee, and this protection can involve an explicit premium.

Individuals should also be treated fairly in the event that the provider enforces any payments due to a breach of contractual terms. Before enforcing payments or foreclosure on the home, providers should engage with individuals and attempt to remedy the situation, and failing this they should provide a notice period before commencing any enforcement proceedings.

When payment to the provider becomes due, either because of death or permanent departure from the home to a long-term care facility, providers should allow for sufficient time for the sale of the home and the fulfilment of contractual obligations. Family members managing the estate normally have around 12 months to manage selling the home, and the grace period can be extended in the event of departure due to long-term care needs to allow more time to sort out the financial situation of the occupant.

6.6.5. Supply-side challenges

While product design needs to limit risks to homeowners, measures also need to be in place to allow providers to effectively mitigate their own risk exposures. These risks include moral hazard, crossover risk, and the length of time until the home is sold.

Providers are exposed to moral hazard because individuals have less incentive to ensure the upkeep and maintenance of their home if they will not benefit financially from doing so. This could lead to a deterioration in the home value, reducing the price at which it can be sold and thereby increasing the risk that providers incur a loss. One way to mitigate this risk is to ensure that homeowners have sufficient resources to finance required maintenance, insurance payments, and property tax. Approaches taken to mitigate moral hazard include requiring adequate financial resources for an individual to qualify for the equity release product, requiring that a certain amount of the funds be set aside for maintenance and upkeep, or requiring that home occupants allow for regular home inspections to ensure the home is adequately cared for.

A key risk exposure for providers of reverse mortgages is the crossover risk that the accumulated loan balance exceeds the market value of the home. For non-recourse loans with NNEGs, this would result in providers not getting full repayment of the loan. Some jurisdictions require an explicit premium for a third party to cover this risk. Another measure to limit risk exposure is to limit the amount that individuals can borrow as a function of their home value and their age. Limits are lower for younger borrowers, say 15% of the home value of someone aged 60, increasing up to around 50% for older borrowers aged 80 and over. Such limits reduce the risk that debt will accumulate to a level exceeding the value of the home.

Imposing a minimum age to access a home equity release product reduces somewhat the uncertainty around when the provider will be repaid by reducing the expected duration of the product. A minimum age of 60 to access equity release products targeting the elderly is common.

Nevertheless, other risks to providers remain, and supply-side challenges can go beyond the regulatory framework around equity release products. For example, financing and capital requirements are a major barrier to entry, which can result in a concentrated and uncompetitive market.

Authorities could consider the introduction of a government-backed programme to ensure the availability of access to good-value products to homeowners where the supply of home equity release products is lacking and where authorities feel such products could improve financial outcomes in retirement. Several jurisdictions taken this approach. However, uptake remains low and further consideration is needed to promote retirees’ awareness of and demand for home equity release products to capitalise on the assets they have available to them in retirement.

References

[7] Alegria Real Estate (2021), Reverse mortgage in Spain: how does it work?, https://alegria-realestate.com/en/articles/reverse-mortgage-in-spain-how-does-it-work.

[11] ASIC (2018), Review of reverse mortgage lending in Australia.

[10] Baily, M., B. Harris and T. Wang (2019), The unfulfilled promise of reverse mortgages: Can a better market improve retirement security?, https://www.brookings.edu/wp-content/uploads/2019/10/ES_20191024_BailyHarrisWang-1.pdf.

[9] Bartsh, F. et al. (2021), Is There a Need for Reverse Mortgages in Germany? Empirical Evidence and Policy Implications, EconPol.

[16] Clow, C. (2020), Wealthier Koreans More Likely to Have Reverse Mortgages in that Country, Data Suggests, https://www.housingwire.com/articles/wealthier-koreans-more-likely-to-have-reverse-mortgages-in-that-country-data-suggests/#:~:text=The%20figure%20has%20been%20steadily%20declining%20since%20then%2C,country%20than%20they%20are%20in%20the%20United%20States.

[4] EPPARG (2024), Standards, https://epparg.org/standards/our-standards/.

[3] Equity Release Council (2024), Our Standards, https://www.equityreleasecouncil.com/about/standards/.

[1] EY (2020), 2020 Global Equity Release Roundtable Survey, https://epparg.org/wp-content/uploads/2021/01/2020-Global-Equity-Release-Roundtable-Survey.pdf.

[5] Financial Conduct Authority (2020), The equity release sales and advice process: key findings.

[17] Fornero, E., M. Rossi and M. Urzi Brancati (2015), “Explaining why, right or wrong, (Italian) households do not like reverse mortgages”, Journal of Pension Economics and Finance, Vol. 15/2, pp. 180-202, https://doi.org/10.1017/s1474747215000013.

[13] Hoekstra, J. et al. (2018), Integrating Residential Property with Private Pensions in the EU, https://repository.tudelft.nl/islandora/object/uuid:7a493e86-ea33-4951-820a-fa98dbf2c04e?collection=research.

[8] Joosten, A. (2015), Equity Release Products: Analysis for the Netherlands, Netspar.

[12] Knaack, P., M. Miller and F. Stewart (2020), Reverse Mortgages, Financial Inclusion, and Economic Development: Potential Benefit and Risks.

[6] Kojima, T. (2013), “How to make reverse mortgages more common in Japan”, Nomura Journal of Capital Markets, Vol. 4/4.

[2] Mayer, C. and S. Moulton (2020), The Market for Reverse Mortgages among Older Americans, https://repository.upenn.edu/cgi/viewcontent.cgi?article=1695&context=prc_papers.

[19] OECD (2012), G20/OECD High-Level Principles on Financial Consumer Protection 2022, OECD Publishing, Paris, https://doi.org/10.1787/48cc3df0-en.

[18] Pfeiffer, S., J. Salter and H. Evensky (2012), “Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage”, Journal of Financial Planning.

[14] Rethink Tokyo (2022), Reverse 60 home loans see 41 percent lending increase, https://www.rethinktokyo.com/news/2022/02/26/reverse-60-home-loans-see-41-percent-lending-increase/1645816254.

[15] Rialland, M. (2023), Le Prêt Viager Hypothécaire et les Prêts Avance Mutation et Rénovation, https://www.moneyvox.fr/credit/viager-hypothecaire.php.

Annex 6.A. Country details

This annex provides some details of home equity products available in the countries included in this chapter.

Australia

The minimum age to access an equity release product is 65. There are four types of products available in Australia:

• Reverse mortgage – Individuals borrow money against their home in exchange for a lump sum, income stream, or line of credit. The loan must be repaid when they sell, move out, or die. Individuals can obtain around 20-25% of their home equity at age 65. Homeowners have the option to repay early, and to protect a portion of their equity in case they will need it in the future to cover long-term care costs. NNEGs are required.

• Home reversion – Individuals can sell their home partially or in full in exchange for a lump sum. There is usually an upfront fee of around AUD 2 000, plus transaction costs. Homeowners may have the option to buy back the sold share, and products can provide a rebate to heirs if the owner dies earlier than expected.

• Equity release – Individuals sell a portion of their home in exchange for a lump sum or instalment payments. They then pay fees as a proportion of the sold equity, which are paid through an additional transfer of equity. As such, fees paid/equity transferred increases over time. The individual may have the right to stay in the home when they retain 0% equity only if the contract allows it.

• Government’s Home Equity Access Scheme – This is a government-sponsored reverse mortgage programme provided by Services Australia and Dept of Veterans Affairs. The loan is secured against any real estate in Australia. Individuals must be eligible for the Age Pension, and have resided in Australia for ten years, of which five consecutive. The maximum loan amount is based on age and real estate value, but individuals can request an increase at a later age if the outstanding loan value remains below the maximum loan for that age. The loan pays a non-taxable fortnightly payment. The sum of the Age Pension and the loan payment must be less than 1.5 times the maximum rate for the Age Pension. Since 2022, individuals can also opt for a lump sum representing up to 50% of the total loan payments over the next year, which would reduce the fortnightly payments accordingly over the year. Individuals can repay the loan at any time, and must cover all legal costs relating to the transaction. All loans have a NNEG.

In 2012 Australia introduced enhanced responsible lending obligations for reverse mortgages. These requirements included:

• an assessment of the needs of the borrower

• maximum LTV ratios for the loan to be considered suitable

• the disclosure of home equity projections from MoneySmart’s calculator, an information statement, a tenancy protection warning, and annual account statements

• an obligation to speak directly to the borrower in the event of a breach of contract, providing a notice period before enforcement proceedings commence.

Some lenders require financial advice, but it is not mandated.

Canada

Individuals must be at least 55 years old to qualify for a reverse mortgage. They can borrow up to 55% of the value of the property, subject to a minimum of CAD 20 000 and a maximum of CAD 750 000. A cooling-off period is mandatory, as is a NNEG. Borrowers are required to pay off any outstanding debt and to close open HELOCs. Financial advice is required in some cases. Proceeds can be paid as a lump sum, in instalments, or as a line of credit. The grace period to pay back the loan will depend on if the owner leaves the home because of death or long-term care. Borrowers can pay back the loan early, subject to any applicable fees.

France

Reverse mortgages were introduced in 2006. Cooling-off periods and NNEGs are required, and there are restrictions around how the products can be marketed. Homeowners are required to consult a notary. Early repayments are subject to fee caps, and interest rates are fixed.

In 2022, a new reverse mortgage product was introduced for low-income households to have finances to make renovations to improve energy consumption. Only two lenders currently offer this product.

Germany

Reverse mortgages were introduced in 2009.

NNEGs are not required. Reserves are set aside to cover the costs of property maintenance. Payments can be made as a lump sum or in instalments.

Home reversions remain more popular than reverse mortgages, but both markets are small. In 2015, there were less than 1 000 outstanding home reversions, and only 200 reverse mortgages (Bartsh et al., 2021[9]).

Hungary

The market for reverse mortgages dried up following the financial crisis.

Some municipalities have home reversion programmes where they pay residents monthly payments for life in exchange for their home (Hoekstra et al., 2018[13]).

Ireland

Spry Finance is the main provider of reverse mortgages. Their product has a minimum age of 60 and offers a NNEG. Borrowers must hire a solicitor. Proceeds are paid as a lump sum. They can transfer the loan to a new property. The loan must be repaid 12 months after moving out of the property.

Italy

A 2015 Decree defined a reverse mortgage and established the minimum age of access at 60. NNEG is required. Borrowers can make early repayments.

Home reversion agreements between two individuals are more common than reverse mortgages.

Japan

The Reverse60 programme in Japan is a government-sponsored programme where loans written at the retail level are insured by the Japan Housing Finance Agency. Financial counselling is required, and the minimum age is 60. Borrowers must pay premiums, which are higher when homeowners opt for the NNEG. Proceeds are paid as a lump sum.

Private providers also offer reverse mortgages, but few have NNEGs and repayment can be triggered if property value declines.

Korea

Korea introduced the government-sponsored JooTaekYeonKeum (JTYK, Housing Pension) in 2007. The programme is insured through the Korea Housing Finance Corporation. The minimum age is 55, and the owner’s mortgage must be paid off. Borrowers can receive lifetime monthly payments, or take instalments over 10 to 30 years, or have a lump sum of up to 50%. Rates are variable, and borrowers must pay NNEG premiums.

Prior to the introduction of the JTYK, private providers offered reverse mortgage products, but they only paid lump sums and did not mitigate any risks for the homeowner.

Netherlands

There is currently only one reverse mortgage product in the Netherlands, offered by Florius Verzilverhypotheek. The minimum age is 67 (increased from 60 more recently), the maximum LTV is 55%, subject to a minimum of 30 000 and a maximum of 250 000. Borrowers are required to receive financial advice, need to choose the duration over which they will borrow funds in advance, and are required to take a minimum lump sum of EUR 4 500 at the contract’s inception. They can make adjustments to the amount of instalment payments. There is a NNEG conditional on selling the house at market value within 12 months, otherwise the heirs must pay back the difference.

New Zealand

Reverse mortgages were introduced in New Zealand in 2003. Products are not required to offer tenant protection, lifetime occupancy guarantees, or NNEGs. Interest rates are variable. Individuals can choose to have a minimum equity guarantee, and are required to take a lump sum of at least NZD 5 000 at the commencement of the contract, otherwise payments can be made in instalments. Borrowers are required to take independent financial advice.

The provider Lifetime introduced a home reversion product to the market in 2023, the first product of this type to be available in New Zealand. In exchange for a partial sale of the home equity, individuals receive payments in instalments over ten years, with the option to extend by ten more years if they are under age 90. Lifetime occupancy is granted.

Norway

Reverse mortgages, or Seniorlån (Senior Loans) require a minimum age of 60, and have a maximum LTV of 49% at age 80. Proceeds can be paid as a lump sum or in instalments. NNEGs are required.

Poland

Reverse mortgages have been regulated since 2014. A 30-day cooling-off period is required. Heirs have 12 months to pay off the loan, otherwise the property title is transferred to the lender. The lender must pay back any excess of the sale price over the outstanding loan amount.

Home reversions are more prevalent, and pay life annuities.

Spain

Reverse mortgages have been regulated since 2007. The minimum age is 65, unless the individual demonstrates at least 33% disability or dependence. Payments can be made as a lump sum, or as a fixed or lifetime annuity. Borrowers must receive financial advice. There are no NNEGs. Interest rates are fixed.

Borrowers with outstanding mortgages have two options. The first is to receive a capital sum from the lender, and when they eventually manage to pay off their mortgage the lender will pay them a small dividend payment for life. Alternatively, dividend payments can begin immediately and go towards paying off the outstanding mortgage (Alegria Real Estate, 2021[7]).

Sweden

Reverse mortgages were first introduced in 2005. There is no requirement for a NNEG. Proceeds are paid as a lump-sum, and borrowers must allow regular inspections to verify the upkeep of the property. Interest rates are variable.

United Kingdom

The minimum age for an equity release product is 55.

Reverse mortgages and home reversions are both regulated by the FCA.

Payments from reverse mortgages can be lump sums, regular instalments, or a line of credit. Providers that are members of the industry body the Equity Release Council (ERC) are required to abide by their standards, which include capping variables rates, right to lifetime residency, right to change properties, NNEG, and allowance for early repayments. Adhering providers pay the ERC a premium to insure themselves against the risk of crossover. Homeowners are obliged to obtain financial advice from an independent FCA-certified advisor, and hire an independent solicitor to carry out the legal work and ensure that they are competent to make the decision to take the product.

Providers of home reversion must take reasonable steps to ensure that the product is suitable. Homeowners must cover costs relating to administration, valuation, and the solicitor. Products may provide a capital protection where heirs receive a rebate if the owner dies much earlier than expected. Owners are obliged to pay off any outstanding mortgage with the proceeds.

United States

The Home Equity Conversion Mortgage (HECM) programme was created in 1988. Loans are available through Federal Housing Administration (FHA)’s approved lenders and are insured by the government. Over 90% of the reverse mortgages in the United States are from the HECM programme.

Homeowners must be at least 62, occupy their home, and have sufficient funds to pay taxes, insurance, and home maintenance costs. They must also pay the mortgage insurance premium of 2% up front and 0.5% annually to cover provider insolvency. Origination fees are capped, as are the monthly servicing fees which are added to the loan’s balance. Payments can be a paid as a lump sum, instalments, life annuity, line of credit, or a combination of these options. The loans are non-recourse. Fixed rates are offered for lump sum payments, otherwise the rate is variable. Before entering the agreement, individuals must meet with an HECM counsellor to discuss eligibility, suitability, and other options to raise funds. The session is not meant to provide guidance, but rather to make sure the individual has sufficient information to make an informed decision.

Fee disclosure and counselling requirements were introduced in 1998. In 2015, rules changed to require the financial assessment of borrowers.

Notes

Notes

← 1.  The scope of the products discussed are those that intend for the product to be used as a source of financing in retirement. The chapter focuses on the products available in 17 jurisdictions where these types of products are available: Australia, Canada, France, Germany, Ireland, Hungary, Italy, Japan, Korea, the Netherlands, New Zealand, Norway, Poland, Spain, Sweden, the United Kingdom, and the United States.

← 2.  See Annex 6.A for details of the specific programmes by jurisdiction.

← 3.  Reverse mortgage lines of credit differ from the Home Equity Line of Credit (HELOC) products offered in many jurisdictions in that borrowers are normally required to pay interest on HELOC’s and must reimburse the credit within a given time frame.

← 4.  A non-recourse loan does not allow the lender to pursue any compensation above the value of the collateral.

← 5.  In line with the G20/OECD High-Level Principles on Financial Consumer Protection (OECD, 2012[19]).

← 6.  Not all HECM products are Department of Housing and Urban Development (HUD) insured loans. Only HECM loans insured by HUD are Federal Housing Administration (FHA).